Chapter 6 Practice Question Answers
- 1. Answer: D. If you purchased a bearer bond or registered bond, you would receive a physical certificate. For a book-entry bond there is no physical certificate and the registration information is usually kept at a depository. Note that bearer bonds can no longer be purchased new, but they can be purchased on the secondary market.
- 2. Answer: D. Owners of a book-entry bond do not receive a physical certificate. Instead, each bond issue has only one master certificate, which is kept at a central depository. Ownership of book-entry bonds is recorded at the depository by computer. Generally, brokers or dealers are listed as owners at the depository in place of their clients, who are the beneficial owners, meaning that the client receives all the benefits of owning the security. The broker or dealer maintains its own records of beneficial ownership. All interest and principal payments are forwarded by the issuer’s transfer agent to the depository, which delivers them to the brokerage account. The brokerage account delivers payment to the beneficial owners. Securities that are registered in the broker-dealer’s name but the customer is the beneficial owner are said to be held in street name.
- 3. Answer: A. Reclamation is the ability to return or to demand the return of a security after it has been previously accepted. A buyer has the right to return a security that was originally accepted, but later determined to not be in good form, while a seller may request the return of a security if they discover that there was an error in delivery.
- 4. Answer: B. For good delivery to occur, securities certificates must be delivered with legal opinions and any other legally required documents. This requirement does not apply if the certificates are identified as “ex legal” at the time of trade. A legal opinion is a statement rendered by a lawyer verifying that the municipality has the authority to issue the bond.